Category Archives: severance

Paying CEOs to Fail

Scott MacDonald thinks the contract language and hiring processes for chief executive officers need to change. As he sees it, some CEOs are great leaders who deserve their seemingly extravagant salaries, but others are highly paid despite their poor performance. And even when they’re fired, they don’t lose out because they’re given a golden parachute — millions of dollars for failing, he says.

In some back-and-forth with me recently about this, MacDonald — former CEO at the Australian company Investa, who wrote a book about his experience there, Saving Investa: How An Ex-Factory Worker Helped Save One of Australia’s Iconic Companies (here’s his website’s information about the book and here’s the Amazon link) — said this to me:

“Every year, we read stories of corporate boards of directors firing a senior executive for unsatisfactory performance and then paying the executive millions of dollars upon his or her departure.

“Several years ago, for example, the Walt Disney Co. hired Michael Ovitz [as president] and then terminated him 14 months later. Ovitz reportedly received a severance package of $140 million. Recently, Wells Fargo admitted that thousands of their employees opened new accounts in customers’ names without consent to generate bigger fees and commissions. The scandal has damaged the bank and led to many investigations and potential fines. The person in charge of the retail division where the scandal occurred announced her retirement and reportedly received about $125 million upon her departure.”

MacDonald says the real problem stems from the narrow definition of “cause” in current CEO’s employment contracts; specifically, the clause that says the executive may be fired “for cause,” in which case nothing more is owed to him or her.

But the definition of cause is still limited to being found guilty of felony acts, committing fraud or stealing from the company. It almost never includes poor performance.

MacDonald’s had a successful career as a CEO turning around struggling companies, often by addressing performance issues. Through his years of experience, he says,

” … the benefits gained from changing personnel have always outweighed the short-term financial cost … . Once, I fired a talented chief financial officer because he was not a team player, typically promoting himself while disparaging other team members. The cost of his termination was significant because being a bad team member was not defined in his “for cause” contract definition, but the entire company performed much better after his departure.”

So how did “cause” become so narrowly defined and almost unenforceable? It’s unclear, MacDonald says, but he has a theory, based on the past 40 years of business as usual, and it even includes human resources. Here’s how he lays it out:

“Generally, a board retains an employment consultant to help negotiate the contract or provide an opinion that the contract is fair and competitive in the industry. The same consultant will often seek to see human resource-related consulting services to CEOs in the future. If a consultant recommends approval of a CEO’s favorable employment contract, the consultant is more likely to be favorably considered when that CEO approves hiring an HR consultant.

“After one board agrees to a narrow definition of ’cause,’ it quickly becomes cited by other executives and their attorneys as the standard. … When an executive is terminated for poor performance but not ‘for cause’ … he or she is typically entitled to all the compensation and benefits that he or she would have received if he or she had not been terminated. This usually includes salary not yet paid, bonuses not yet earned, stock options not yet vested and various other entitlements. If a terminated executive has three years left on a contract, the company often has to pay three years of full compensation as if the executive had been a stellar executive.”

So what can we do to turn this around? Simple. According to MacDonald, just broaden the definition of “cause.” Successive years underperforming [against] a pier group of companies should be cause for termination. And if a dispute occurs over the performance measures, submit it to an arbitration panel for resolution.

Other items we might consider cause for dismissal could include successive poor results on confidential employee surveys, failure to meet budget targets in successive years, failure to follow written directives from the board … his list goes on.

Companies that provide audit services to another company are generally not permitted to provide other consulting services to avoid influencing the impartiality of the audit. Similarly, says MacDonald, “companies that provide employment-contract services could be forbidden from providing other consulting services to the company involved.”

Finally, he says, when an employee is terminated without cause, he or she should not be paid full bonuses for all the remaining years of their contract. “Clearly,” he says, “the bonuses would not be earned.”

Layoffs or No Layoffs, Employees Come First

Whatever side of the layoff story you find yourself on — now or in the 187065451 -- layoffsfuture, conducting them or avoiding them at all costs — don’t ever lose sight of your employees’ experiences.

That seems to be the collective message of two articles I came across recently, written on the same day, no less. One, from the Harvard Business Review site, written by the chief executive officer of Scripps Health, Chris Van Gorder, trumpets that company’s no-layoffs policy.

The other, from the Society for Human Resource Management site (registration required), details Target Canada’s recent “unprecedented” move to offer a $70 million severance package to the some 17,600 employees who are slated to be laid off by mid-year 2015 as the company exits the Canadian retail market.

A more recent HREOnline news analysis by Senior Editor Andrew R. McIlvaine, “Cushioning the Blow,” highlights the merits of giving severance to everyone. In that story, Sanjay Sathe, founder and CEO of San Jose, Calif.-based outplacement consultancy RiseSmart, is quoted saying that, “if the No. 1 goal of severance is to take care of employees, then the practice should be to offer it to all employees.”

Without a doubt, taking care of employees is at the heart of both the Target and Scripps Health examples mentioned above.

As Brian Cornell — CEO and chairman of Target’s U.S. parent company, Target Corp. — says in a statement:

“We do not take lightly the impact that our decision to discontinue operations in Canada will have on Target Canada’s team members who have worked tirelessly to make improvements to the guest experience. That is why we took the unique step of establishing the employee trust.”

More specifically, that’s why his company has set up a trust fund for employees to receive 16 weeks of pay, an amount that will be kept separate from Target’s restructuring process. Lisa Stam, a partner at Koldorf Stam in Toronto, calls the severance amount “unprecedented.”

Anil Verma, director of the Centre for Industrial Relations and a professor of human resource management at the University of Toronto’s Rotman School of Management, tells SHRM it’s “unusual” for a company to protect its employees with a trust fund. In his words:

“[Laid-off employees] will also accrue certain benefits, such as medical and life insurance. This act demonstrates that Target is a good employer.”

In defending his decision to establish a no-layoff policy, which “isn’t the norm in my [nonprofit] industry,” Van Gorder shares his belief that “a no-layoffs philosophy is good for employees’ physical and psychological health.” As he puts it:

“I’ve seen what it’s like to carry out mass layoffs — I had to do that in the 1990s at a hospital that was in bad financial shape. I vowed never to let myself get into that position again. Instead, nonprofits need to match institutional discipline with authentic good will toward employees, developing effective employee-assistance and wellness programs and eliminating anxiety about job security.

“Who knows? If enough nonprofits master this balancing act, then maybe we can teach the for-profit world something for a change. … In today’s economy, organizations are supposed to treat employees almost as free agents, with low expectations of loyalty on either side. … But paternalism works — even in the 21st century, and even in an industry undergoing disruption.”

Just some food for thought, I thought.

Latest Wrinkle in Employers’ Severance Policies

More of a case has been made for some much-needed and immediate reviews of employers’ severance policies.

476619387 -- money and gavelAs this story from Bloomberg lays it out, the U.S. Supreme Court just decided in favor of the Obama Administration and its Internal Revenue Service in a dispute over taxes on severance compensation, overturning a lower-court decision that could have forced the IRS to refund more than $1 billion.

In its ruling in the case of Quality Stores Inc., the court has said payments to laid-off workers are subject to Social Security and Medicare taxes under the Federal Insurance Contributions Act. In essence, the defunct company fired 3,100 workers when it closed its stores in 2001 and 2002, paid the taxes on their severance and then asked a bankruptcy judge to order the IRS to refund $1 million.

Obviously, this is a huge victory for the IRS, which has been fighting more than 2,400 refund claims from companies and their ex-employees. It’s also a huge wake-up call in the business community. As Bob Hertzberg — the lawyer representing Quality Stores before the Supreme Court — told Bloomberg: “The decision is a huge blow for employers and employees alike. In addition to the impact on Quality Stores and its former employees, this ruling has far-reaching implications for the thousands of other organizations and workers fighting for refunds.”

This news comes right on the heels of a news analysis by HRE Staff Writer Mark McGraw about a U.S. Equal Employment Opportunity Commission lawsuit against CVS Pharmacy Inc. that experts say could also shake up how companies approach severance agreements.

In that case, the EEOC is charging that CVS “conditioned the receipt of severance benefits for certain employees on an overly broad agreement set forth in five pages of small print,” and interfered with their right to file discrimination charges and/or communicate and cooperate with the EEOC, according to the suit.

As A. John Harper III, a partner in the labor and employment practice group in the Houston office of Haynes and Boone, told McGraw, the provisions in the CVS separation agreement coming under scrutiny are “common in many severance and other employment-related agreements.”

Comments he got from Robert Hale, a Boston-based partner and chair of Goodwin Procter’s labor and employment practice, are worth repeating, too:

If the EEOC wins here, that would make it difficult for employers to reach agreements that prevent former employees who accept severance pay [from making] disparaging statements or [disclosing] personnel information that many employers understandably view as confidential.”

At the very least, as this case makes its way through the courts and as the Quality Stores decision continues reverberating, employers should be closely evaluating their severance agreements. As Hale puts it,

HR should work with counsel to take a hard look at existing severance agreement forms to determine whether any steps should be taken to reduce the risk that a decision in this case would make those existing agreements more vulnerable to legal challenge.”